Borrowing is bad – we all get that.
Now, can we adults in the room have a conversation about debt? We’re the people who recognize that well-managed borrowing is part of everyday life, and thus have set up a home equity line of credit.
Home equity credit lines are the smartest, cheapest way to borrow money, and you should definitely have one in your back pocket if you have the discipline to manage it.
Some people don’t, and so the federal government included home equity credit lines in the campaign against household debt growth announced earlier this week. The Bank of Canada has also expressed concerns about the role of these loans in propelling debt to alarming levels, and so has Peter Aceto, chief executive officer at online bank ING Direct.
Let’s get something out of the way right up front. ING will introduce a new home equity line of credit product at some point this year. No, Mr. Aceto is not a hypocrite. He’s a realist on the matter of Canadians borrowing too much and his views are worth hearing if you have a home equity credit line yourself.
“I don’t think there’s anything sick, wrong or dirty with the invention of the home equity line of credit,” Mr. Aceto said in a conversation he initiated to get his concerns about national debt levels on the record.
His take on when to use a home equity credit line? “If you have a home and you want to use some of your equity so you can do renovations, or so you can pay down more expensive debt. If you’re doing the responsible thing.”
Growth in credit line usage suggests people aren’t that discriminating. According to the Bank of Canada, the volume of home equity lines of credit and loans has risen by as much as 170 per cent in the past decade, almost twice as fast as mortgage debt.
Why They're Popular
Home equity credit lines are popular because they allow the average person to borrow at the lowest possible rate because their house is used as security. These credit lines used to be available at the prime rate, currently 3 per cent, but since the financial crisis the banks have been padding their profits by charging a markup of half to a full percentage point.
If you have credit card debt, probably pegged at something close to 19 per cent, it’s beyond smart to pay off the balance with a home equity line of credit to take advantage of the much lower rate. In fact, it’s almost essential.
A case can also be made for using credit lines to build or protect personal wealth. An example would be to redo your worn-out kitchen or invest in stocks, funds or property.
Credit lines can also be useful for bridging a short period between the purchase of something and the arrival of money to pay for it. Where they’re a menace is when people fall into the habit of what Mr. Aceto calls “using your home as an ATM machine.” Can’t quite afford something you want right now? You can buy it using your home equity credit line and then pat yourself on the back for not being a sucker paying credit card interest.
The ATM Syndrome
It’s ATM-style borrowing that Ottawa has targeted through the largely symbolic decision to stop offering government-backed insurance to banks for home equity credit lines sold to clients.
